Bank of Canada hikes interest rate for first time in 7 years

The central bank last raised its key interest rate target in September 2010

The Bank of Canada raised its key interest rate Wednesday for the first time since September 2010, but said there is “no predetermined path” for further increases and that rate policy would be examined on a quarter-by-quarter basis.

Bank of Canada Governor Stephen Poloz called the rate increase to 0.75 per cent, which will immediately impact adjustable-rate mortgages and home equity lines of credit, “a symptom” of a growing economy that is now expected to reach full capacity by the end of the year.

Soon after the announcement, Royal Bank of Canada, the Bank of Montreal, TD Bank, Scotiabank and CIBC all announced they were increasing their prime rates — the rate banks use to set interest rates for variable-rate mortgages and other loans — to 2.95 per cent from 2.7 per cent, effective Thursday.

Canada’s central bank had cut interest rates in 2015 to help the economy navigate a plunge in oil prices, but Poloz said recently that those rate cuts had done their job.

On Wednesday, Poloz cautioned that forecasting any future rate trend is hampered by heightened geopolitical uncertainty for trade and investment due to such factors as U.S. policy under President Donald Trump and the outlook for world oil prices.

The bank must also consider any potentially negative impacts of rate hikes on the oil patch and on consumers, who Poloz called especially vulnerable due to historically high levels of household debt.

The bank said its new outlook for real GDP growth is 2.8 per cent for 2017 (up 0.2 of a percentage point from April), 2.0 per cent in 2018 (up 0.1 of a percentage point from April) and 1.6 per cent in 2019 (down 0.2 of a percentage point from April).

The hike comes as inflation remains below the central bank’s target, although it said lower food prices, electricity rebates in Ontario and changes in automobile pricing are expected to fade.

The Bank of Canada said it expects inflation to return to its 2 per cent target by mid-2018. Inflation is expected to average below 2 per cent this year and next, and reach 2.1 per cent by 2019, slightly above target.

“We need to be targeting inflation in the future (since) any action we take is only going to have its full effect in 18 to 24 months,” Poloz said.

“Growth is broadening across industries and regions and therefore becoming more sustainable,” the bank’s governing council added in a statement. “As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding.”

Jean-Paul Lam, an associate professor of economics at the University of Waterloo and former assistant chief economist at the Bank of Canada, said that even with a rapidly growing economy and the labour market performing well “there is no urgency to raise interest rates.

“Inflation and inflation expectations remain well below their target of 2 per cent. There are risks to growth and inflation coming from potential trade barriers, geopolitical events and a U.S. economy that is facing slower growth due to the uncertainty coming from the Trump administration.”

Arlene Kish, senior principal economist at IHS Global, said that although rates remain very low by historical standards, “diverse growth, the temporary pass through of weak inflation and the labour market slack absorption supports another increase in the overnight rate later this year, in October 2017.”

And while there was no additional guidance on the timing of further rate hikes, the Bank of Canada said withdrawal of some of the monetary policy stimulus in the economy is now warranted. Kish noted that there was also no indication that the bank would pause.

The Bank of Canada’s next rate announcement is set for Sept. 6. (from Toronto Star. July 12, 2017)